(AKA Physician Finance 101)
The road to becoming a physician involves a great deal of pain. Don’t believe me? Ask my brother the Doctor (or his wife) who spent untold hours counselling me through Undergraduate, Medical School, and Residency (regarding fears not just limited to failing an exam…a list that would certainly be too long and expose my underlying anxiety disorder). However, I am sure that almost all physicians would find truth in the statement that becoming a doctor is the epitome of delayed gratification:
- Physicians typically start families later in life (7.4 years later than the general population).
- Physicians delay earning a living (Physicians begin with full-time salaries 10 years later than the average college graduate).
- The Pre-Medical and Medical Education involves a lot of missed family events, parties, and much of what would be considered “the college experience” in order to study for and excel on exams.
All of this can naturally lead to some financial behaviors with negative consequences in the post-training life. The following list (garnered from my 20+ years of experience) provides some suggestions to avoid those mistakes.
1. Spend less than you make
(AKA The Golden Rule of Personal Finance). I know it seems obvious, but according to a study by the AARP, more than half of all Americans run their financial lives in the red. In fact, at the time of writing this post, America’s biggest “House” is significantly in the red (U.S. National Debt $25,300,000,000,000).
“When you get in debt, you become a slave.” Andrew Jackson
2. Live (or die) by the budget
Live (or die) by the budget. Prior to many of the currently available budgeting tools, I used to painstakingly enter all of my household expenditures into a budgeting software spreadsheet to track our finances. It was helpful to visualize monthly costs in order to keep my spending under control. I would have monthly “State of the Union” addresses with my wife which consisted of a lot of eye rolling by her and initially insistence by her that she makes her own money and can thus spend it as she sees fit, but would generally end with us agreeing to modify any problematic spending…if I’m being truthful, it would actually end up with my agreeing to make up for over-expenditures in her budgetary line-items (such as ‘Shoes’) by reducing my spending (by cutting my own hair, washing and pressing my own shirts, and cutting back on our food budget by eating all my meals from the physician lounge and hospital cafeteria). Nowadays, there are a lot of great budgeting tools, many of which are free (Everydollar, Mint) that include the ability to migrate your transactions from bank accounts and credit cards. Create a budget for how you are going to spend and save your money and stick with it.
3. Live like a resident
When you finally finish your training and sign a contract to begin your first real job, there will be a very strong urge to begin living the life you “deserve” after all that hard work and delayed gratification. The smartest decision I made after I got my first job, and while my wife completed her training, was to continue to live beneath our means, rent rather than buy a place to live, and to aggressively pay down on both of our student loan debt. Decisions to forego buying a home, a new car, and many of the other costly expenses in that first 1-2 years can make a big difference in your future finances.
“Frugality is not a bad word and is certainly not the same as being cheap.” musingMD
4. Save early and often
Start saving as soon as you begin earning. For my wife and I, it began during residency with putting aside small amounts into IRA’s we set up for each of us. It wasn’t a lot of money but it began the habit of saving for our future and we certainly had the advantage of time for our money to grow. Take advantage of direct withdrawal from your paychecks for the money to go directly to your retirement account and take advantage of any employer matches that are offered along with any tax-advantaged pre-tax or Roth retirement savings.
5. Don’t be house-poor
Don’t be house poor. As a physician, you will likely find that the banks will be ready to loan you money for a home based on your future earning potential. Conservative planning suggests that your house payment along with property taxes and insurance should be no more than 25% of your take home pay. Don’t fall into the trap of buying at the top of your budget, creating a need for longer term loans to lower the monthly payments. When we built our first home, whenever we would consider budget-busting modification to our home, our builder (who became a great friend) would advise us against additional expenditures as he would remind us that this is just a “starter home” that we would only live in for a few years and would therefore not get the money out of the extra costs. 20 years later, we are still in that same home and it is mortgage free. Although it has been a great home in which to raise our family, our home is certainly nothing ostentatious and every time my kids tell me about a friend’s enormous opulent home, I think about my decisions to have a more modest home and wear this as a badge of honor.
6. Fight the urge to look like a Dr.
I will never forget the words of wisdom I received from our practice administrator when I first began my job 20 years ago. “Don’t go and buy a BMW just because you can.” He was referencing how physician parking was in the same lot as patient parking and nothing made his job more difficult than having to deal with patients upset about a bill they had received from the “rich doctors in their luxury cars.” I still think about that when I get out of my aging Honda as patients watch intently to see which doctor drives that car.
7. Credit Cards: A useful but dangerous tool
Many debt advisors will tell their clients to get rid of credit cards because it can be too easy to purchase items with a credit card that you don’t actually have the money to buy. If this is your situation, you should probably avoid credit cards. However, if you are able to follow your budget and pay your monthly credit card bills in full, credit cards can be a useful tool freeing you up from carrying around large sums of cash or a checkbook for purchases. Additionally, some credit cards offer cashback of 1-2% on purchases you would ordinarily be making each month (gas, groceries, utilities, etc.) as well as offering warranty extensions and also serving as a budgeting tool with quarterly statements breaking down your expenditures based on type.
8. Don’t confuse liabilities with assets
This is an important misunderstood and misrepresented topic that became clear to me after reading “Rich Dad Poor Dad” (NYT Bestseller x 6 years) by Robert Kiyosaki. Our society (and financial institutions) view assets as something that has monetary value and therefore lumps such items as homes, cars, and boats into the asset category. However, as Kiyosaki argues, these items actually cost you money to own in the form of property taxes, insurance, maintenance, etc. and in the case of cars and boats, lose significant portions of their value once they are purchased and used and should, therefore, be considered liabilities. Banking institutions refer to our personal homes as assets although only such things as rental properties, businesses, and the like should be considered assets since assets should generate income/revenue. Kiyosaki makes the case that the rich spend their money acquiring assets while the middle class and poor spend their money acquiring liabilities.
In this regard, I take the philosophy of Japanese organization expert, Marie Kondo (Google her if you don’t know who she is) who instructs her clients to ask themselves if an item brings them “joy” when attempting to determine whether to keep or discard a personal possession. Using a boat as an example, anyone who has owned one is aware of the fact that they can require a lot of your time and a fair amount of money for maintenance and storage in winter climates. However, if some of your family’s best times and memories are spent on that boat fishing, waterskiing, or just sunning, it may be well worth the costs. That is how I try to evaluate any new item before purchase; will it bring me joy and at what cost? And although it was a great place to raise my kids and at the end of every long day I love to return to my home, I don’t delude myself into thinking that it is an asset.
9. Don’t spoil the next generation
There are many reasons why we may overindulge our kids with toys, clothes, and electronics as some examples. This may be our attempt to provide things we didn’t have when we were young or possibly we carry some guilt related to our work and our own perceived lack of time for our kids. But you really don’t improve upon the future generation with these attempts at satisfying all their desires. It is important for kids to learn to differentiate between wants and needs. You may choose to spend your money on those things which do serve to improve them including professional lessons for instruments, dance, language, sports and associated equipment. Once our kids were showing proficiency and devoting adequate time to their musical instrument of choice, we spent the money to upgrade their instruments to more professional-grade standards. And although we always pushed academics first with our children, we likewise upgraded their tennis racquets without question once their skills developed to a level commensurate with the new equipment.
But despite all of this, we always tried to instill in them the appreciation for these costs and that these items were to be well taken care of. And although all of their needs were satisfied, we tried to leave them with some unfulfilled wants.
10. The financial position of F*#! You/Emergency Fund
One of my favorite scenes from a movie comes from “The Gambler” when John Goodman’s character, Frank, a loan shark, gives a speech to Mark Wahlberg’s character, Jim Bennett, a destitute and penniless gambler who had blown a $3 million gambling surplus, about saving up enough money to purchase a home, a reliable automobile and then invest the rest so that your earnings pay your basic financial needs. He called this putting yourself in a position of “F*#! You.” He explained how this gave you the freedom to walk away from jobs and situations that had become intolerable. The field of Medicine is no longer one that automatically guarantees continual employment with vast salaries. The current COVID-19 pandemic has demonstrated that to many physicians who have found their patient volumes, revenues, and therefore, practice financial stability in question.
I can personally attest to the fact that living and saving carefully has been a source of comfort for both myself and my wife when concerning changes in our medical environment raised the specter of a potential need for relocation to new employment. We knew that we did not need to rely on our monthly paycheck to survive if this were to occur as we were not living paycheck to paycheck and were saving diligently. I have also included this idea of having an adequate Emergency Fund as part of these suggestions. With nearly half of Americans reporting in a Federal Reserve Board survey that they would have trouble managing a $400 unexpected expense, it is clear that an Emergency Fund is an overlooked essential. Typically 3 months of expenses is adequate but 6 months is an even better cushion against sudden job loss, major disasters, etc.
11. Insurance
I can think of no other item in which we spend so much money with the intention of never needing it. When one purchases insurance, they hope they never need to use it, or else they have had a car accident, become disabled, or died (Auto, Disability, and Life Insurance). However, no sound financial plan is without adequate insurance. You have worked hard to get to where you are and disability could leave you without a way to support yourself and your family. Get the most allowed by law, guaranteed renewable, and own specialty-specific and realize that if your employer pays for this, it will be taxed as opposed to purchasing it yourself. As you age, it becomes more difficult and costly to obtain. Life insurance is similar in this regard and I recommend getting adequate coverage to ensure the well-being of your family long after you are gone including college expenses for your children and a lifetime of living and healthcare costs for your surviving spouse. Health, malpractice, and auto insurance are pretty obvious and mandated by law. Just don’t forget that big target on your back by virtue of your degree and seriously consider an umbrella (liability) insurance policy to help protect personal assets in the event of a liability judgment against you for accidents related to your home or automobiles. When deciding to purchase necessary insurance, seek professional advice and pray you never need to use your policies. Included with this, don’t forget to seek a competent attorney with experience working with high-income individuals to set up a Will, Trust and counsel you on asset protection.
12. Charity
“For everyone to whom much is given, from him much will be required.” Luke 12:48.
The U.S. has consistently ranked as the top nation for charitable giving, which is not surprising based on this country’s wealth. Other factors that contribute include the fact that our nation is the most religious nation in the industrial world, with religion being the most motivational factor for charity. Additionally, it is believed that our country’s long-standing tradition of neighbors helping neighbors (mutual aid) rather than waiting for the government to fix problems also drives charitable giving. The wealthiest in our country certainly give the largest proportion and Middle-class Americans donate a little less. In an interesting study analyzing IRS income and giving data, the lower-income population gave more than the middle, and in some measures, more than the top as a percentage of available income. I always remember my father impressing upon me that “God will bless you many times over with riches for your charity.”
Make a regular habit of charitable giving. Put it in your budget and research causes that you feel strongly about and donate to organizations that are responsible with your money with low administrative costs. Of all the things on which you will likely spend your money, you will never regret charitable contributions.
I will leave you with some parting statistics to consider:
- Financial problems is the #1 cited reason for divorce in the U.S.
- Financial problems is the #1 cited concern in the U.S.
- People with debt are three times more likely to have a mental health issue, especially depression, anxiety and psychotic disorders.
- Financial stress is the second most common cause of suicide, after depression.
While money is certainly not the key to happiness, it can serve as a tool to allow you to make the most of your most important asset, time (retire earlier, vacation with family, etc.). Furthermore, you can also significantly improve the lives of others through charitable donations.
“If you want happiness for an hour — take a nap.’
If you want happiness for a day — go fishing.
If you want happiness for a year — inherit a fortune.
If you want happiness for a lifetime — help someone else.”
Chinese Proverb